Generally, water heaters fall into one of two types: (i) tankless or instantaneous water heaters, and (ii) storage or tank water heaters. Each type of water heater has its advantages and disadvantages, and the decision to use one over the other for a particular application involves trade-offs in various performance issues. The present invention relates to a water heater that takes advantage of beneficial aspects of both water heater types while avoiding some disadvantages of each.